Must-Read: Adair Turner: Demystifying Monetary Finance
Must-Read: The very sharp Adair Turner continues to push the case for “helicopter money”. Me? I do not understand why there is a debate. I return to Jacob Viner (1933): Balanced Deflation, Inflation, or More Depression. As I said [back in 2011][]:
Milton Friedman’s teacher, the ur-monetarist Jacob Viner… recommended coordinated monetary and fiscal expansion: the Federal Reserve buys bonds for cash, and the Treasury than issues bonds and spends, in order to (a) expond the money supply, (b) directly put people to work and (c) keep falling interest rates from further depressing monetary velocity and so crowding out the beneficial effects of monetary expansion…
Adair Turner: Demystifying Monetary Finance:
If the government cuts taxes, increases public expenditure, or distributes money directly to households, and if the central bank creates permanent new money to finance this stimulus, citizens’ nominal wealth will increase…
[back in 2011]:
…unlike with debt-financed deficits, they will not face increased future taxes to pay off the debt incurred on their behalf. Some increase in aggregate nominal demand will inevitably occur, with the degree of stimulus broadly proportional to the amount of new money created. But the debate about monetary finance is burdened by deep fears and unnecessary confusions. Some worry that helicopter money is bound to produce hyperinflation; others argue that… it would be no more effective than current policies. Both cannot be right. One argument that it might be ineffective stems from the specter of a future “inflation tax.”… That is obviously true – and irrelevant. As I argue at greater length in a recent paper, no “inflation tax” can arise without increased inflation, which will result only if there is increased nominal demand. The idea that a future “inflation tax” can stymie the ability of money finance to stimulate aggregate nominal demand is a logical absurdity….
Monetary finance is fundamentally different from debt finance only if the money created by the central bank is permanently non-interest bearing. Effective monetary finance therefore requires central banks to impose mandatory non-interest-bearing reserve requirements. Doing so is entirely compatible with raising policy interest rates when appropriate, because the central bank can pay zero interest on mandatory reserves, while paying the policy interest rate on additional reserves….
Two questions should determine whether monetary finance is a desirable policy option. The first is whether we need more nominal demand. The strong global consensus nowadays is that we do…. But it may not be a desirable option if – and this is the second question – the political risks of monetary finance are just too great…. Fear of that outcome is so great that it seems to motivate some economists to search for technical reasons why monetary finance would be ineffective. But that unconvincing exercise simply diverts attention from the crucial question: can we design rules and institutional responsibilities that ensure that monetary finance is used prudently? If we cannot, we may be stuck with ineffective tools and disappointing economic performance for many years to come.